Definition: A Vertical Marketing System (VMS) includes all supply chain components, including producer, wholesaler, and retailer, used to serve the customer.
The key characteristic of VMS is close integration among all partners.
Why is a Vertical Marketing System Required?
In a traditional marketing system, all supply chain components work separately, causing a waste of resources, energy, unnecessary processes, and conflicts.
Therefore, to avoid losses and earn a profit, these components joined hands and started working together as a Vertical Marketing System. This helped them retain their core business, avoid unnecessary processes and earn more profit.
Components of a Vertical Marketing System
A Vertical Marketing System has three components:
- Corporate Vertical Marketing System
- Contractual Vertical Marketing System
- Administered Vertical Marketing System
Corporate Vertical Marketing System
The organization brings all supply chain and distribution channel elements under one roof in a corporate vertical marketing system.
The organization produces the product, distributes it to the store, and sells it through its own branded stores.
Example
Apple, Amway, and Firestone are a few examples of a Corporate VMS.
These companies build their products and sell them through their stores only.
Contractual Vertical Marketing System
Under a contractual Vertical Marketing System, though all components work as an integrated system, the complete ownership is not held by one entity. Each component has ownership and works under a contractual agreement.
This approach lets businesses focus on their core business and leverage the economies of scale to become more competitive.
Examples
These days, most companies use this model to sell their products. For example, Pepsi, Coca-Cola, McDonald’s, etc.
Administered Vertical Marketing System
This marketing system has no single ownership or contractual agreement among components of the marketing system, but one business controls the whole system due to its power and sheer size.
Example
Amazon is a classic example of this model.
Many vendor distributors, delivery services, etc., work with Amazon because they get a lot of business. They follow the Amazon terms and conditions with no questions asked.
Advantages of Vertical Marketing System
- Improves business efficiency as a whole
- Improves efficiency of all components
- Benefits the economy of scale
- Reduces conflicts
- Less wastage of resources
- Allows small businesses to enter the supply chain
Summary
In a Vertical Marketing System, all members, manufacturers, distributors, and retailers work as a group to fulfill consumer requirements. Regardless of the type of Vertical Marketing System, all components always have close contact to serve the consumer better and earn profit that was not possible with working alone.